Welcome to post #4 in my blog post series “Behind the Scenes at P&A”. If you’re new to the series, you can read the previous three installments by clicking on the links below.
Last month, I included a breakdown of some specific functions a Lead or Service Advisor might fulfill for our clients, and this month, I wanted to delve more deeply into how both roles assist with required distributions from traditional and inherited IRAs. First, we’ll briefly revisit distribution rules for the aforementioned account types (Roth IRAs have no distribution rules, unless they’re inherited), and then we’ll look at how your P&A team adds value to the distribution process.
Even if you don’t yet meet the criteria to be taking required distributions, I would highly encourage those of you with traditional and inherited IRAs to read this information in anticipation of eventual distributions. Remember, if these distributions aren’t taken in the proper amount at the proper frequency, a penalty tax of 50% is incurred on every dollar that should have been withdrawn!
When you are the owner of an IRA, including SEP and SIMPLE IRAs, you are required to take an annual distribution amount (called an “RMD”) from the account once you reach age 72. This rule was effected in 2020 with the passing of the SECURE Act, raising the RMD age from 70 ½ to 72. It applies to those whose 70th birthday fell on or falls after July 1, 2019. (Remember, however, the CARES Act waived RMDs in 2020, so don’t panic if you were eligible at that time but didn’t take one.)
When you are the beneficiary of an IRA or Roth IRA, deciding how to distribute the money can be a slightly more complex process depending upon a variety of factors. Your P&A team can help by discussing your eligibility for certain distribution options. These can include rolling assets into an existing IRA, taking a lump-sum distribution, or opening an “Inherited IRA” in your name, among others.
If you decide to open an Inherited IRA, there are two methods of distribution: the life expectancy method (now for spouses and eligible designated beneficiaries only) and the 10 year method. The former method divides the total value of the account by the beneficiary’s anticipated length of life and requires annual distributions (RMDs). The latter method simply requires the entire account be distributed, in whatever frequency and amount, by Year 10 following the original owner’s date of death. These methods apply as long as the decedent passed away on January 1, 2020, or after, per the SECURE Act. (If the decedent passed away prior to January 1, 2020, however, the life expectancy method is the only distribution method available for Inherited IRA owners.)
How we help
If you are a traditional IRA owner, you never have to worry about calculating your RMD on your own; your P&A team is equipped with the tools to do so for you. The same applies to Inherited IRAs being distributed under the life expectancy method.
Your Service Advisors keep track of who should be taking RMDs each year and how much they have taken or have yet to take. This benefits the client in one of two ways:
1. If we’re a couple months out from year-end and you haven’t taken your RMD, we’ll get in touch. We don’t want that 50% penalty to sneak up on you!
2. If you are already taking automatic monthly distributions from your IRA, we check up on this at the very beginning of every year to make sure those distributions will cover your increased RMD. We’ll reach out with forms if we need to adjust those monthly amounts.
If you are an inherited IRA owner under the 10-year rule, your Service Advisor keeps track of the 10-year deadline, and your Lead Advisor can have a strategic conversation with you about how to distribute the account by then. Taking distributions may not seem like an immediate priority with a deadline 10 years down the road, but waiting to start withdrawals could cost you in the form of a higher tax bill later, especially if the account has appreciated over time. Thus, discussing periodic distributions with your Lead Advisor may be advantageous to keep your costs lower in the long run.
Finally, if you don’t have big plans for your RMD, your entire P&A Team is here to discuss other options for the amount. This might include reinvesting the money in your brokerage account, gifting it to family member(s), sending it to a charity of your choice, and more. Lead Advisors can talk through strategy and tax consequences, if any, and Service Advisors can assist with the actions you decide to take.
There are many rules and ramifications that factor into required traditional and inherited IRA distributions. Whether you are approaching or have already entered the distribution phase, we at P&A are here to help you keep track of your distribution amounts, navigate any tax considerations, and inform you of your options for the money. As always, our doors, phone lines, and inboxes are open Monday through Friday, 8AM to 5PM! Thanks for reading.
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Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
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